Scrap Dealer Wins Rs. 6.77 Cr Tax Battle as ITAT Accepts Bank Reconciliation, Rejects Dept's 'Mechanical' Approach [Read Order]

The Agra Bench of the Income Tax Appellate Tribunal (ITAT) dismissed a revenue appeal and upheld the deletion of an addition of Rs. 6.77 crore made under section 68 of the Income Tax Act against a scrap trader. The Tribunal found that the Assessing Officer had mechanically treated the difference between bank credits and book receipts as unexplained income without appreciating the reconciliation furnished by the assessee.Bharat Varshney of Aligarh, who runs a proprietary concern, M/s G.M.C. Enterprises engaged in trading of ferrous and non-ferrous scrap. For the assessment year 2022-23, he declared an income of Rs. 31.42 lakh. The case was picked up for scrutiny under CASS on the grounds of low income compared to TCS receipts. During assessment, the Assessing Officer noted that total credits in the assessee’s bank account stood at Rs. 35.23 crore, while sales as per books were Rs. 26.96 crore. After certain adjustments, the officer worked out a difference of Rs. 6.77 crore and added it as unexplained credits under section 68 read with section 115BBE.

The assessee explained that the bank credits did not represent sales alone but also included GST collections, VAT refunds, internal transfers, short-term loans, contra entries and other adjustments. A detailed reconciliation was filed showing that the difference of Rs. 6.77 crore was fully explained. The Assessing Officer, however, rejected the explanation on the ground that no proper reconciliation was furnished and proceeded with the addition.

On appeal, the Commissioner of Income Tax (Appeals), NFAC, examined the reconciliation in detail. It was noted that the breakup included Rs. 4.85 crore towards GST on sales, Rs. 1.61 crore as a short-term loan from Gvan Metal Co., Rs. 16.75 lakh as internal bank transfers, and other smaller items such as VAT refund, sweep interest and contra entries. The CIT(A) observed that the assessee had supported the reconciliation with bank statements, ledgers and GST details, and that the Assessing Officer had failed to appreciate that bank credits cannot mirror sales figures exactly. The addition was accordingly deleted.

The revenue carried the matter to the Tribunal, contending that the CIT(A) had erred in accepting the assessee’s explanation without proper verification and that the omission of the lender’s name in the audit report cast doubt on the loan transaction. The assessee’s counsel argued that the reconciliation was fully supported by records and that minor omissions in the audit report could not override substantive evidence.

The Bench comprising (Accountant Member) M. Balaganesh and (Judicial Member) Sunil Kumar Singh upheld the CIT(A)’s order. The Tribunal noted that the reconciliation matched with the bank statements and that the Assessing Officer had adopted a mechanical approach in making the addition without considering the nature of bank entries. It held that the omission in the audit report could not be a ground to discard cogent evidence.

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